The Little Book That Builds Wealth - Pat Dorsey

The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments by Pat Dorsey is all about moats.
Big idea: A company with a sustainable competitive advantage has an “economic moat.” Moats help companies fend off competition, stay profitable, and reward shareholders over time.
Goal: Become an expert in recognizing moats.
Types of moats: Four primary types—intangible assets, switching costs, network effect, and cost advantages.

Don’t get fooled by fake Moats

Common mistaken moats include:

Great products: These may drive short-term success, but without protection (e.g., patents), competitors can easily replicate them, reducing profit margins (e.g., Chrysler’s minivan success quickly diluted by competitors).
Large market share: High market share doesn’t guarantee future success, as seen in companies like Kodak and IBM, which failed to defend their positions.
Operational efficiency: Being more efficient than competitors is important but does not create a lasting moat unless it’s based on a unique, hard-to-replicate process.
Great management: While talented leaders can improve performance, management alone is not a sustainable competitive advantage, as executives often come and go, and their impact is harder to predict.

Real Economic Moats

The true moats that create long-term competitive advantages fall into four categories:

Intangible assets: Brands, patents, or licenses that are difficult for competitors to replicate.
Switching costs: Products or services that are hard for customers to give up, creating loyalty and pricing power.
Network effect: A company becomes more valuable as more people use its product, making it harder for competitors to break in.
Cost advantages: Companies with superior processes, location, scale, or access to resources that allow them to offer products or services more cheaply than competitors.

These structural competitive advantages set successful companies apart, helping them generate sustainable high returns on capital.

Intangible Assets

Intangible assets like brands, patents, and regulatory licenses can create significant economic moats by giving companies unique positions in the marketplace.
These assets allow companies to act like mini-monopolies, extracting more value from customers. However, not all intangible assets are durable, and they can lose their value over time.

1. Brands

A brand creates a moat only if it leads to pricing power or customer loyalty.
Simply having a well-known brand doesn’t guarantee a competitive advantage. Brands must convince customers to pay more or return repeatedly. For example, Tiffany charges a premium for its diamonds thanks to its brand, while Sony struggles to do the same with its electronics.

2. Patents

Patents offer legal protection that prevents competitors from selling the same product. While they can be valuable, they are not always durable due to their limited lifespan and legal challenges.
Pharmaceutical companies often face challenges to their patents, especially after they expire, which weakens their economic moat. Only companies with diverse portfolios of patents and strong innovation can maintain this moat over time (e.g., 3M and Merck).

3. Regulatory Licenses

Regulatory licenses can create strong moats by limiting competition. A regulatory advantage allows companies to charge monopoly-like prices without being regulated, as seen with Moody’s and its 50% operating margins.
In industries like slot machines and education, regulatory approval is difficult to obtain, keeping new competitors out and giving incumbents a strong moat.
NIMBY (not in my backyard) industries like waste management and aggregate production (e.g., Waste Management and Vulcan Materials) enjoy durable moats because local regulations prevent new competitors from entering these spaces.

Switching Costs

Big idea: Customers who find it hard to switch stay put, even if they want to leave.

Why it works: Changing can be painful (think banks or software). The harder it is to switch, the stronger the moat.Sometimes the cost of switching outweighs any benefits from switching to a competitor.

Examples of Switching Costs

Software Companies (Intuit)
Intuit, the maker of QuickBooks and TurboTax, benefits from high switching costs. Small businesses that use QuickBooks have so much embedded data that switching to a competitor’s product would be time-consuming and risky, especially if financial data were lost in the transition. Even if a competing product is cheaper or has better features, the cost of switching usually outweighs the benefit. As a result, Intuit dominates the market.
Tightly Integrated Products (Oracle, Fiserv, Precision Castparts)
Companies like Oracle and Fiserv, which provide complex database and data-processing services, create switching costs because their products are deeply integrated into their clients’ operations. Switching to a competitor would not only be costly in terms of time and money but also risky, as any disruption in data processing could cause significant problems. Similarly, Precision Castparts benefits from switching costs because its high-quality metal components are critical to the safety and performance of jet engines and turbines. Customers like General Electric are unlikely to switch suppliers due to the high risk involved.
Propane Distribution
Propane distributors in rural areas benefit from switching costs because customers lease propane tanks from their current supplier. Switching to a new distributor involves not only canceling the service but also physically swapping out the tanks, which is a hassle and sometimes comes with a fee. As a result, customers rarely switch distributors, giving these companies pricing power.
Health Care and Lab Equipment (Waters Corporation)
Companies like Waters Corporation, which makes liquid chromatography machines, benefit from switching costs because their equipment is expensive, and switching to a competitor would require retraining lab technicians and possibly losing productivity. The high cost of replacing equipment and retraining staff means customers stick with Waters, allowing the company to achieve impressive returns on capital.

The Weakness of Consumer-Facing Firms

Unlike B2B companies, many consumer-facing firms (e.g., retailers, restaurants) suffer from low switching costs. Consumers can easily switch from one store or product to another with almost no cost or hassle. This makes it difficult for these companies to create moats based on switching costs, though some manage through economies of scale (e.g., Wal-Mart) or strong branding (e.g., Coach).

The Network Effect

Big idea: The value of a product increases as more people use it.

Why it’s powerful: Once a network hits critical mass, it’s tough for competitors to break in.

Examples: eBay, Visa, and Facebook. More users create more value for everyone involved.

Examples of the Network Effect in Action

eBay: eBay dominates the online auction market because buyers and sellers flock to where the most activity is. Even with lower fees, competitors can’t match eBay’s user base, making it nearly impossible for them to gain traction.
Financial exchanges: Platforms like the Chicago Mercantile Exchange (CME) benefit from the network effect because buyers and sellers prefer markets with greater liquidity, making it hard for new exchanges to compete.

However, network effects are not unbeatable. In Japan, eBay failed because Yahoo! Japan launched first, building a large user base before eBay could enter. Similarly, eBay struggled in China against local competitors who offered better features and lower fees.

Industries with Strong Network Effects

The network effect is most common in industries based on information or knowledge transfer, such as financial markets, software, and logistics. For example, Western Union thrives because its vast network of locations allows it to process far more transactions than competitors.
Companies like C.H. Robinson and Expeditors International also benefit from the network effect by connecting shippers with carriers, making them more valuable as their network grows.

Cost Advantages

Big idea: Companies that can produce goods or services cheaper than others have a powerful moat.

Why it matters: If you can produce at a lower cost, you can outprice competitors and stay profitable.

Types of Cost Advantages

There are three main sources of cost advantages:

Cheaper Processes: Developing a more efficient way to produce a product or service.
Better Locations: Being closer to resources or customers to reduce transportation costs.
Unique Assets: Owning a rare or valuable resource that others cannot easily replicate.

1. Cheaper Processes

Companies can gain cost advantages by developing innovative or more efficient processes. This type of advantage can last for a while but is often temporary, as competitors can eventually replicate the process. Examples include:

Dell revolutionized the PC industry by selling directly to customers, cutting out middlemen, and keeping inventory low. However, competitors like Hewlett-Packard eventually copied Dell’s model, narrowing its advantage.
Southwest Airlines reduced costs by flying a single type of plane, which reduced maintenance and turnaround times. But as low-cost competitors emerged, Southwest’s advantage shrank.

2. Better Locations

Location-based cost advantages are more durable because they are difficult for competitors to replicate. Being near customers or resources can significantly reduce transportation costs, which matters in industries with heavy, low-cost goods.

Waste management and aggregate producers (like gravel companies) benefit from being close to their customers. The cost of transporting garbage or construction materials rises with distance, so companies with landfills or quarries near urban areas have an advantage.
Posco, a Korean steel producer, benefits from being close to the Korean auto and shipbuilding industries, reducing transportation costs and giving it a leg up on international competitors.

In these cases, location provides a durable moat that competitors struggle to overcome.

3. Unique Assets

Owning a unique, valuable resource can also create a strong cost advantage. For example:

Ultra Petroleum has access to extremely low-cost natural gas wells in Wyoming, allowing it to produce gas at half the cost of its competitors.
Compass Minerals owns a rare, low-cost rock salt mine under Lake Huron, making it one of the cheapest producers of salt for de-icing roads in the Midwest.

These types of advantages are tied to the ownership of a specific resource, which makes them very difficult to replicate and provides long-lasting moats.

Durability of Cost Advantages

Cost advantages are generally more durable when they are tied to location or unique assets because these are harder for competitors to copy. However, process-based advantages can erode as competitors innovate or adapt. The durability of a cost advantage depends on how easily competitors can replicate or outdo it.

The Size Advantage

Big idea: Bigger can be better—especially when size drives down costs or creates efficiencies.

Distribution scale: Think UPS and its vast network. The more packages it delivers, the cheaper each one becomes.
Manufacturing scale: Bigger factories mean lower per-unit costs, like with ExxonMobil’s oil refining.
Niche dominance: Even smaller companies can dominate a market niche and enjoy scale benefits (e.g., Graco in industrial pumps).

Understanding Scale and Cost Structures

In industries with high fixed costs, larger companies often enjoy economies of scale by spreading these costs across more units, making them more efficient than smaller rivals.
In contrast, industries with mostly variable costs (like real estate agencies) see little benefit from size.

Types of Scale Advantages

Scale advantages can be broken down into three key areas:

Distribution Networks
Manufacturing
Niche Market Dominance

1. Distribution Networks

Companies with extensive distribution networks can gain significant advantages by lowering the cost per delivery as they increase volume. Once a delivery network is in place, the incremental cost of delivering additional items is very low, making large networks incredibly profitable.

United Parcel Service (UPS) benefits from a dense ground delivery network, allowing it to deliver packages more profitably than competitors. In contrast, FedEx relies more on expensive air transportation, which has higher variable costs.
Darden Restaurants, operator of Red Lobster, efficiently delivers seafood across hundreds of U.S. locations, creating a cost advantage over smaller competitors.
Stericycle, a medical waste disposal company, has a dominant position due to its vast network, allowing it to serve more customers per route and generate higher returns.

Large distribution networks are extremely difficult to replicate, making them a strong and durable moat.

2. Manufacturing

Manufacturing scale allows companies to reduce unit costs by maximizing production capacity and spreading fixed costs across more output. Factories that operate closer to full capacity are more profitable.

Exxon Mobil demonstrates this advantage by having the largest and most efficient refining and chemical operations, enabling it to outperform smaller competitors like Valero and BASF.
Electronic Arts spreads the fixed costs of video game development across its vast customer base, making it easier to create high-quality games compared to smaller studios.

Manufacturing scale isn’t limited to factories. Any company that can spread large fixed costs over more units, such as software developers or media firms, can benefit from economies of scale.

3. Niche Market Dominance

Even companies that are relatively small in absolute terms can achieve significant scale advantages by dominating a niche market. These companies often enjoy near-monopoly status in small markets where it’s not economically viable for competitors to enter.

Graco, Inc. specializes in industrial pumps and paint sprayers, earning high returns by controlling a small but profitable market. Its products represent a small percentage of total production costs for its customers, yet are crucial to the final product’s quality.
Blackboard, a software company, holds two-thirds of the market for university learning management systems. Its dominance in this niche market gives it a moat, as competitors are unlikely to invest heavily in such a small market.

Niche market domination often leads to monopoly-like conditions, where the market is too small to support multiple competitors, resulting in high profitability for the dominant player.

The Durability of Scale Advantages

Scale-based cost advantages are durable because they create high barriers to entry. New competitors would need to match the incumbent’s size or efficiency to compete effectively, which is often difficult or uneconomical. However, the durability of these advantages can vary:

Distribution and niche market advantages are usually long-lasting, as they are hard to replicate.
Manufacturing advantages can be more vulnerable to shifts in technology or production methods, especially in globalized industries.

Eroding moats

Big idea: Moats don’t last forever. Technological shifts or changes in industry dynamics can erode competitive advantages.

Technological Disruption

One of the biggest threats to a company’s moat is technological disruption. While most tech companies operate in an environment where innovation is crucial, non-tech companies can also find their moats weakened by technology. Companies that rely on outdated technologies or fail to adapt to new trends can lose their competitive edge rapidly.

For example, Eastman Kodak once dominated the photography industry with its film business. However, the advent of digital photography severely undercut Kodak’s business model, leaving it struggling to adapt. Similarly, the long-distance telephony industry, once a cash cow, was devastated by the rise of Internet-based phone calls.

The key lesson here is that industries and companies that are enabled by technology may be more vulnerable to disruption than those that sell technology.

Industry Consolidation

Changes in industry structure can also erode moats. For example, the rise of big-box retailers like Walmart and Target has given these companies immense bargaining power over their suppliers, squeezing profit margins for consumer goods companies like Clorox and Newell Rubbermaid. This consolidation among customers has made it harder for suppliers to maintain pricing power, leading to a narrowing of their moats.

The entry of low-cost manufacturers from countries like China and Eastern Europe has also hurt many industries, especially in sectors where labor costs play a significant role in competitiveness, such as the U.S. wood-furniture industry.

Irrational Competition

Another significant threat is the entry of an irrational competitor—a company willing to operate at a loss or pursue non-profit-driven goals. For example, in the jet engine industry, Rolls-Royce slashed prices on both engines and maintenance contracts during the 1980s, forcing rivals General Electric and Pratt & Whitney to follow suit, hurting profit margins for all players.

Growth Without a Moat

A self-inflicted threat to moats occurs when a company pursues growth in areas where it has no competitive advantage. Companies often believe that expanding into new markets or products will automatically bring success, but growth without a moat can erode profitability.

Microsoft is a classic example. Despite its wide moat in operating systems and office productivity software, Microsoft has wasted billions of dollars on ventures outside its core business, such as MSN, MSNBC, and the Zune. These investments have not generated significant returns and diluted the company’s overall profitability.

Instead of chasing growth in unprofitable areas, companies with wide moats should focus on their core strengths and return excess cash to shareholders.

Pricing Power Deterioration

One key signal that a company’s moat may be weakening is customer pushback on pricing. If customers begin to resist price increases or start seeking alternatives, it may be a sign that the company’s competitive advantage is eroding. For instance, Oracle faced resistance when trying to raise prices on its software maintenance contracts due to the emergence of third-party providers offering similar services at lower costs.

Finding Moats

Big idea: Some industries are better at creating moats than others.

High-moat industries: Financial services, consumer goods, and business services often house companies with sustainable advantages.
Low-moat industries: Auto parts and industrials are tough places to build moats because of fierce competition and commoditized products.

Industry Matters

Some industries are inherently more conducive to creating economic moats than others. For example, the auto parts industry is notoriously difficult for companies to build lasting moats. In contrast, the asset management industry is filled with firms that have significant competitive advantages.

Auto parts manufacturers typically struggle due to the cutthroat nature of the industry, where pricing power is low and profit margins are thin. Companies like American Axle may have had temporary success when demand for SUVs was booming, but shifts in the market quickly eroded their profitability.

On the other hand, the asset management industry benefits from high barriers to success, as it often requires a large distribution network to attract significant assets under management. Even in challenging times, firms like Janus were able to recover after losing assets and reputation, thanks to the stickiness of their customer base.

Moats by Sector

Some sectors are more fertile grounds for finding companies with economic moats:

Technology: Software firms tend to have higher switching costs than hardware companies, making it easier for them to build moats. For example, Cisco Systems has created switching costs by embedding software into its hardware products.
Telecommunications: Many telecom companies outside the U.S. benefit from favorable regulatory environments that protect their competitive advantages. However, U.S. telecom firms often rely on niche markets to build moats.
Media: Companies like Disney and Time Warner enjoy strong moats due to their control of unique content and distribution networks. However, technological disruption from the Internet threatens to weaken some of these advantages.
Health Care: Larger health care firms, especially those selling drugs or medical devices, tend to have strong moats due to the high barriers to entry in their markets. Smaller niche players like Respironics and Gen-Probe can also build durable moats by dominating specialized markets.
Consumer Services: Retailers and restaurants often struggle to create moats due to low switching costs. However, companies like Best Buy, Target, and Starbucks have succeeded by consistently offering a superior consumer experience.
Business Services: Firms that integrate deeply into their clients’ operations, such as DST Systems and Fiserv, can build high switching costs, giving them strong moats. Companies with specialized databases, like Dun & Bradstreet, also benefit from significant competitive advantages.
Financial Services: This sector is a goldmine for moats, with companies like Goldman Sachs and asset managers benefiting from high barriers to entry. Even average banks benefit from high switching costs, while financial exchanges thrive due to the network effect.
Consumer Goods: The home of many of Warren Buffett’s “inevitables,” this sector is filled with wide-moat companies like Coca-Cola, Colgate-Palmolive, and Wrigley, whose strong brands allow them to maintain profitability over the long term.

Measuring Profitability

Once you’ve identified a potential moat, it’s important to measure the company’s profitability relative to its capital. Companies that efficiently generate high returns on capital are better investments because they can create more wealth for shareholders over time.

The three most common metrics to assess profitability are Return on Assets (ROA), Return on Equity (ROE), and Return on Invested Capital (ROIC). ROIC is often the most comprehensive measure because it considers both equity and debt, giving a clearer picture of the company’s efficiency.

Moats Are Where the Money Is

Investors should focus on industries and companies where moats are more common. Some sectors, like financial services and consumer goods, are rich in moats, while others, like auto parts, are not. Identifying businesses that can sustain strong returns on capital over time is the key to successful long-term investing.

Management Matters Less Than You Think

Big Idea: In the long run, economic moats matter more than star CEOs. A company’s competitive advantage is rooted in its business, not its management.

Why Management Doesn’t Define a Moat

Structural Moats Rule: Moats, like brand power or cost advantages, impact long-term success far more than a CEO’s decisions.
Industry Determines Outcomes: Strong industries (asset management, software) help businesses thrive, while tough industries (auto parts, retail) weigh them down, regardless of who’s in charge.

Exceptions Are Rare

Starbucks: Dug a moat in a tough industry.
JetBlue: CEO David Neeleman couldn’t overcome brutal airline economics.

Lesson: The industry, not management, largely determines a company’s success or failure.

Why CEOs Get Too Much Credit

Media Focus: Business reporters focus on CEOs to craft stories, making it seem like executives control outcomes more than they actually do.
Human Bias: We crave simple, person-driven narratives, but management usually can’t change industry dynamics.

Bet on Moats, Not CEOs

Easier to change CEOs than industries: It’s rare for great management to turn around a bad industry.
Moat as a safety net: A company with a strong moat can survive mediocre management.

Warren Buffett nailed it: “When management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Key takeaway: Always bet on the company’s structural moat over management skill. It’s the business model, not the CEO, that drives long-term success.

Where the Rubber Meets the Road

To identify a company with an economic moat:

Check returns on capital. Strong, consistent returns suggest a possible moat.
Determine the source of the advantage. Is it brand power, cost leadership, or network effects?
Assess the moat’s durability. Some moats are fleeting, while others can last for years.

Now that you know how to identify great businesses, the next step is figuring out when they’re trading at a fair price.

What’s a Moat Worth?

Even the Best Company Will Hurt Your Portfolio If You Pay Too Much for It

Valuing a Stock

Valuing a company is difficult and uncertain. Every company is different in terms of growth, returns, and competitive advantage. Future financial performance is unknown, making valuation harder than comparing gas prices or car prices.

But here’s the good news: you don’t need to know the exact value of a company. You just need to know that its stock price is lower than the most likely value of the business.

What’s a Company Worth?

A stock is worth the present value of all the cash it will generate in the future—period. Companies create value by investing capital and generating returns. The remaining cash, after covering expenses and reinvestment needs, is free cash flow, or “owner earnings.”

For any company, four factors matter:

Growth: How large will the future cash flows be?
Risk: How likely are those cash flows?
Return on Capital: How much investment is needed to run the business?
Economic Moat: How long can the company fend off competitors?

Invest, Don’t Speculate

There are three tools for valuing companies: price multiples, yields, and intrinsic values. Understanding how to use these tools starts with understanding what drives stock returns.

Returns on a stock come from two things:

Investment return: Earnings growth and dividends.
Speculative return: Changes in the price-to-earnings (P/E) ratio, reflecting investor sentiment.

Focus on companies with moats to maximize your investment return. By paying attention to valuation, you minimize the risk of negative speculative returns, meaning you won’t suffer from market swings.

Tools for Valuation – How to Find Stocks on Sale

Having emphasized the importance of valuation, let’s dive into price multiples, one of the most commonly used valuation tools. While they can be helpful, they’re often misused. Here’s how to use them effectively.

Price-to-Sales (P/S) Ratio

The P/S ratio is the stock price divided by sales per share. It’s useful for cyclical companies or those with temporarily depressed earnings because even struggling businesses usually have sales. However, not all sales are equal—a dollar of sales at a high-margin software company is worth more than a dollar of sales at a low-margin retailer.

The P/S ratio works best for companies with temporarily low margins or room for margin improvement. If you spot a company with historically high margins but a low current P/S ratio, it may be a hidden gem.

Price-to-Book (P/B) Ratio

The P/B ratio compares a company’s market price to its book value (shareholders’ equity). Book value represents a company’s physical assets, like factories or inventory, but doesn’t include intangible assets like brands. This makes P/B less useful for companies where competitive advantages (like brands) aren’t reflected in book value.

Be cautious of goodwill, which inflates book value when a company buys another business. Subtract goodwill to get a clearer picture of the true tangible book value. P/B is most useful for financial companies, where assets like loans are easy to value.

Price-to-Earnings (P/E) Ratio

P/E is the most popular multiple. It compares a company’s price to its earnings. While it’s helpful because earnings reflect value, P/E can be tricky since earnings fluctuate.

There are different types of “E” in P/E—last year’s earnings, this year’s estimate, or forecasted earnings. Be cautious with forecasts; they’re often too optimistic for high-flyers and too pessimistic for struggling companies. It’s best to estimate how much the company could earn in an average year, factoring in good and bad periods.

Once you have your estimate, compare the P/E to competitors, the market, or the company’s historical P/E. But always remember to consider the company’s growth potential, returns on capital, and competitive advantage when comparing P/Es.

Price-to-Cash Flow

The price-to-cash flow ratio uses cash flow from operations instead of earnings. Cash flow provides a clearer picture of a company’s profitability because it shows the actual cash moving in and out of the business. Earnings can be affected by accounting adjustments, while cash flow reveals how much money the company really generates.

Companies that get paid upfront, like subscription-based businesses, tend to have higher cash flow than earnings, so they may look expensive using P/E but more reasonably priced with price-to-cash flow.

Yield-Based Valuations

A yield-based approach, like earnings yield (earnings per share divided by stock price), flips the P/E ratio. For example, a P/E of 20 gives a 5% earnings yield. You can compare this yield to bond yields. Stocks with higher yields offer a better return potential, though they come with more risk.

A more refined tool is the cash return, which measures the cash generated relative to the entire business value (market cap + debt). It helps assess how much cash flow you’d receive if you owned the entire company. For instance, Covidien had a cash return of 9.6%, which looks attractive compared to bond yields.

Key Tips for Valuation

Consider the Four Drivers: Always factor in risk, return on capital, competitive advantage, and growth when valuing a company. Companies with high returns on capital, low risk, strong moats, and growth potential are worth more.
Use Multiple Tools: Don’t rely on just one ratio. Combine P/E with P/S or cash flow ratios for a fuller picture.
Be Patient: Great companies don’t trade at bargain prices often. Keep a watch list and wait for the right price.
Stay Tough: The best buying opportunities come when the news is bad and everyone else is selling. Be prepared to act when others are afraid.
Do Your Own Research: Understand the companies you invest in. Relying on your own analysis gives you confidence to make tough decisions when others panic.

Buying a stock without considering valuation is like buying a car without looking at the price. A great company can still be a bad investment if you overpay. Always make sure valuation works in your favor.

When to Sell

Before selling, ask yourself these questions. If you can’t answer “yes” to any of them, hold on to the stock:

Did I make a mistake?
Has the company changed for the worse?
Is there a better place for my money?
Has the stock become too large a portion of my portfolio?

Mistakes Happen

If you made an error in your analysis—like overestimating growth, misjudging competition, or misunderstanding management’s actions—it’s time to sell. Hanging onto a stock based on invalid reasons is rarely a good idea.

Changing Fundamentals

Even good companies can hit a wall. If the fundamentals of the business deteriorate and don’t look like they’ll rebound, consider selling.

Better Opportunities

Selling to fund a better opportunity is often a smart move. Even in a taxable account, it can be worth shifting money from a modestly undervalued stock to one with huge upside potential. Just be careful not to constantly tweak your portfolio for small gains—save the moves for compelling opportunities.

Too Big a Slice

If a stock has performed so well that it now represents a large part of your portfolio, it might be time to trim it down. While some investors are comfortable with concentrated positions, others prefer to limit individual stocks to 5% of their portfolio. If a stock’s size makes you uneasy, consider reducing your exposure, even if it’s still undervalued.

Focus on Value, Not Price

None of the reasons to sell involve stock prices directly. Selling because a stock has dropped or skyrocketed is illogical unless the value of the business has changed. It’s tempting to make decisions based on past performance, but what really matters is the future performance of the business.

Always stay focused on the future of the company, not the past performance of the stock.